David Kiefer and Adrian Cole, King & Spalding LLP
This is an extract from the third edition of GAR’s The Guide to Construction Arbitration. The whole publication is available here.
Joinder of necessary parties
Cost overruns on a construction project can arise from a number of causes, such as delays, inefficiencies and defects, which can be the responsibility of a number of participants in the process. These participants, which include owners, contractors, subcontractors and equipment suppliers, typically enter into a number of separate contractual agreements, each with their own dispute resolution provision. In order to achieve a universal resolution of the entire dispute, parties may want to join all the interested parties into a single proceeding, so an award can be apportioned appropriately and inconsistent decisions avoided.
Arbitration rules generally allow claims arising out of more than one contract to be brought forth and decided in a single arbitration and for multiple arbitrations to be consolidated into one. Consolidation is only appropriate with the consent of the parties or when the disputes arise from the same legal relationship and the arbitration agreements are compatible. While consolidation of all issues arising from the same project presents considerable efficiencies, there are a number of caveats to keep in mind before embracing this approach. First, each of the separate agreements must provide for an arbitration before the same arbitral body. If not, the parties will have to negotiate and agree to a separate dispute resolution agreement that provides for arbitration before the same body or a common ad hoc arrangement if an arbitral institution is not adopted. Second, arbitrating all disputes among all of the parties should make sense strategically and not compromise a party’s ability to effectively present its case. For example, if an engineering, procurement and construction (EPC) contractor is in an arbitration with an owner over alleged defects in equipment supplied by the EPC contractor, the EPC contractor may not want to join the original equipment manufacturer (OEM) in the arbitration with the owner, but instead pursue a separate arbitration with the OEM under their equipment supply agreement. The reason for avoiding joinder in this case is that the EPC contractor might find itself in the unenviable position of defending the equipment in order to rebut the owner’s claim, while simultaneously pursuing a defect claim related to this same equipment against the OEM. This would allow the owner to ‘divide and conquer’ – a situation which could be avoided if the EPC contractor waited to bring an arbitration against OEM until after obtaining the results of the arbitration against the owner. This same dynamic could be at work where an EPC contractor is a consortium made up of two different companies (e.g., an engineering firm responsible for design in a consortium with a contractor responsible for construction). These consortium partners may want to air their grievances against one another in a forum to which the owner is not privy in order to avoid making allegations that could help the owner’s case against the consortium.
Discovery and document exchange
Construction arbitrations are often won or lost based on the availability and significance of documents contemporaneously created at the time the issues in the case arose. Examples of such documents and data include cost accounting records, schedules, meeting minutes and site reports. The party requesting these documents will often need the production of all of these documents in order to recreate a timeline of events for a schedule analysis or to decipher how extra costs were tracked and categorised at the time they were incurred. Requesting all of a type of document can be seen as a ‘fishing expedition’ by some arbitrators, with the preferred method being requests for the production of specific documents. There is a basis for making broader requests, however, with the ICDR Rules allowing requests for ‘specific documents or classes of documents’ and the IBA Rules on the Taking of Evidence in International Arbitration (the IBA Rules), which are typically incorporated in the Terms of Reference in many arbitrations, allowing requests for a ‘narrow and specific requested category of Documents’. Therefore, practitioners can pursue these documents by requesting them by category, but will bolster their chances of successfully receiving the documents if they keep the categories specific tailored to issues in the dispute and satisfy the tests of relevance and materiality. For example, a request for all of a contractor’s accounting records may be rejected as too broad, while a request for the cost accounting records related to a differing site condition claim being advanced by the contractor is more likely to bear fruit.
Of course, the most voluminous type of document sought in discovery are emails. With project management personnel from all of the parties sending and receiving dozens of emails daily, the pool of potentially relevant emails can easily number into the millions. Unlike the previous set of documents discussed, most parties do not want the production of all of the emails sent and received by the opposing parties. Instead, each party wants only those emails that are germane to the issues it sees as relevant. In order to get those relevant emails, each party must cast a net wide enough to allow for scenarios and circumstances it may only suspect existed, while being focused enough to prevent the reception of data that is wholly irrelevant to its case. It is here that the rules governing most arbitrations fall silent and fail to provide helpful guidance. Therefore, it is up to the parties to come to an agreement on a protocol for the production of electronically stored data, such as emails, and the arbitrators to oversee and insist on a process that is both fair and efficient. Such a protocol should recognise the need for metadata showing the provenance of the evidence to be preserved. Preferred methods of culling out irrelevant data include the use of search terms whereby the requesting party formulates its requests and then comes to an agreement with the producing party on a set of search terms to be run against the universe of data to find responsive ‘hits’. A newer method is the use of predictive coding, which uses an algorithm to cull out emails relevant to the issues most important to the parties. Because they are largely silent on the issue of electronic discovery, arbitration rules allow the parties and arbitrators to come to an agreement on methods such as these that will allow for the production of key evidence in way that is commensurate with the overarching goal of ‘maintaining efficiency and economy’.
It is difficult to overstate the importance of experts in the proper resolution of construction disputes. Thorough and convincing expert testimony can help a party prevail on any of the host of issues that typically arise in construction disputes. Experts in construction matters are often used to decipher engineering standards, analyse schedule delays, perform forensic accounting and find the root causes of defects. Expert opinions are not limited to these core issues, however, and can speak to everything from market conditions for loss of revenue claims to weather patterns for claims of force majeure. At bottom, a single arbitration can find itself dealing with the opinions of a number of experts, each of which will be expected to testify at the eventual hearing.
Fortunately, arbitration rules have been developed to accommodate and fully utilise expert witnesses. The IBA Rules provide that the arbitrators may require experts opining on the same issue to meet and confer and report on the areas on which they agree and disagree. Indeed, it is becoming the accepted practice for experts of like discipline to receive common instructions so as to ensure that their evidence is relevant and comparable to that of the opposing expert. This is only one tool that arbitrators may employ to bring efficiency and clarity to what can be a morass of expert opinion. Others include requiring experts to meet on a ‘without prejudice’ basis to discuss their respective positions and to prepare a statement of what its agreed and disagreed allowing for an earlier crystallisation of contested evidence. It is also not uncommon for arbitrators to ask parties to have the experts on the same issues testify together in a panel in front of the arbitrators at the hearing. This practice, which is sometimes referred to as witness conferencing or ‘hot tubbing’, can also help the arbitrators to make efficient use of the experts in a matter by cutting through posturing and building a degree of consensus. Finally, arbitration rules also allow for the tribunal itself to appoint an independent expert to advise it on issues in the case. This option, perhaps more common in civil law jurisdictions, allows an arbitral tribunal to be independently educated on issues and form the basis for its decision on a source of information untainted by party bias. A common occurrence with this approach, however, is that parties will still seek to engage their own expert advisors to assist them in making their submissions to the tribunal, which can lead to a proliferation of experts and additional cost.
One criticism of expert testimony in arbitrations is that the applicable rules do not provide tribunals with an adequate ‘gatekeeping’ function to prevent experts from testifying as to issues beyond their expertise and qualifications. Arbitrators typically do not perform the sort of robust, pre-hearing screening process judges do to ensure that an expert’s testimony is not only relevant, but based on a reliable foundation. As a result, experts in construction arbitrations have been known to drift into the realm of contract interpretation and provide their ‘expert opinion’ on how to interpret the commercial terms agreed to by the parties. Discerning tribunals will limit such testimony by instructing counsel to focus his or her questioning on more useful topics or by simply ignoring the testimony when it comes time to write the award. Even in such cases, however, the gatekeeping does not occur until the hearing at the earliest. This inefficient approach can create an incentive for experts and counsel to push the boundaries of expert opinion in ways that they would not if their case were in a court before a judge.
A defining feature of international arbitration is the use of prepared witness statements in lieu of live direct testimony. The witness statements provide a written recitation of the witnesses’ account of their testimony and are provided to the tribunal and the opposing party well in advance of the hearing. Attached to the statements are the exhibits to which the witness is referring and will, presumably, support the points he or she is making. In construction cases, these exhibits can include voluminous and technical project documents, such as monthly reports and root cause analyses. This method of providing direct testimony presents real benefits to the parties and the tribunal. To the extent permitted by applicable laws, the presenting party can prepare and perfect the statement of the witness as it relates to the exhibits without having to worry about rehearsing a flawless live performance at the hearing, which can be difficult and awkward when a witness is speaking to large and confusing documents. The opposing party will have ample time to review the witness statements and prepare an efficient cross-examination that does not need to be crafted in the brief moments between direct and cross-examination in a courtroom. Finally, the tribunal will have the benefit of an organised presentation of the evidence provided by the witness and can come into the hearing with its own thoughts and questions it wants answered by the witness. Overall, the use of witness statements makes for an efficient, comprehensive and orderly process that it is tailored to accommodate the type of evidence introduced in construction disputes.
Recognising that parties cannot always wait the years it will take for an eventual final award to have an exigent issue addressed, arbitration rules allow for interim or conservatory measures. The International Chamber of Commerce and International Centre for Dispute Resolution Rules both provide for such relief and both allow for parties to also seek interim relief from a judicial authority as well. These rules also provide that the requesting party can be made to furnish the appropriate security, as would be typically required by a court of law in the event an injunction was issued.
There are times when parties to construction cases will have the need for such interim measures to maintain the status quo until the tribunal provides the award based on the full hearing on the merits. This need can arise when a contractor seeks to block a draw on a performance bond or letter of credit by an owner. A draw on a letter of credit can harm a contractor’s credit rating and put it in the position of having to wait until the final award to attempt to recoup the amount from what may or may not be an insolvent owner. Therefore, a contractor will often want a determination that the owner should be prevented from making the draw before it happens. A contractor may also want to block an owner from terminating its contract. In either scenario, the parties can get an interim ruling that addresses the exigent issue while the remainder of the case moves towards the full hearing. Where interim measures are required at the outset of a case before a tribunal has been appointed, emergency arbitrator procedures promoted by the leading arbitration centres may be of assistance. It should be pointed out, however, that while these rules can assist the arbitration, there can be many times when they are not as effective as a party may wish. Parties are often unable to enforce the interim or conservatory measures obtained and national courts in some jurisdictions will not enforce partial awards.
Most arbitration rules afford tribunals and the parties considerable flexibility in how they present their cases. This flexibility can facilitate efficient case management and avoid unnecessary delay or expense. This is especially so if notice is taken of available guidance on techniques for controlling time and cost in arbitration. For example, the use of Scott Schedules for tabularising the positions of parties or experts on multiple headed claims (such as defects, variations or quantum issues) can provide a structured framework for readily assimilating the case as presented and for recording the tribunal’s decisions upon it. This sort of flexibility would most likely not be found in the courts of most judicial systems. Practitioners before arbitral tribunals should also expect arbitrators to ask witnesses questions directly. This practice also helps to focus the presentation on the issues the tribunal believes are important to its eventual decision and award.
Although tribunals will allow for flexibility, practitioners will also be held to commonly accepted standards of fairness in presenting evidence. Privileged communication between clients and attorneys will be maintained, although the degree of recognition of this privilege will vary depending on the law governing the dispute. Tribunals are also expected to consider concepts of relevancy, burden, general admissibility, weight of the evidence and fairness in determining what evidence to allow into the hearing. These rules give tribunals considerable leeway as gatekeepers to determine exactly what evidence they will consider. For example, there are no provisions expressly calling for the exclusion of hearsay, however, a tribunal could rightfully exclude such evidence on the grounds of admissibility and fairness. Furthermore, while practitioners should demonstrate the behaviour expected of professionals, new rules and guidance are emerging to sanction those that engage in guerrilla tactics and other unacceptable conduct.
Notwithstanding the considerable freedom that national laws grant to parties to resolve their disputes in arbitration rather than in state litigation, care must be taken to ensure that applicable arbitration rules are not inconsistent with or contravene provisions of applicable national law. In the Middle East, for example, there are a number of national law requirements, some unstated, with which compliance is mandatory if an award is to be enforceable. Some of these requirements are not addressed or are inconsistent with the rules of some of the international arbitration institutions. These requirements impact, among others, the giving of evidence of witnesses, the taking of oaths and the timing and signing of arbitration awards. Fortunately, over time, esoteric local requirements are being superseded by new arbitration laws, often based on the UNCITRAL model law as states recognise the commercial benefits that a modern arbitration law can bring.
In conclusion, arbitration has become the preferred method of resolving construction disputes for good reason. Arbitral institutions and their rules generally allow parties and tribunals the flexibility needed to accommodate the unique nature of these disputes, within the overarching goal of achieving economy and efficiency. Furthermore, such rules may be amended or supplemented by agreement to reflect the needs of a particular dispute or the jurisdiction in which it is seated. In short, the construction industry is well served by arbitration and it follows that construction disputes will remain a significant portion of the caseloads of all major arbitral institutions in the years to come.
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